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Is Peru’s Outsourcing Burst About to Go Bust?

Is Peru’s Outsourcing Burst About to Go Bust?
Did Aegis pick the wrong time to set up in Peru?

An overvalued global commodities market could prove dangerous to Peru outsourcing if economic conditions at home deteriorate and education budgets are slashed. Last month Indian contact center operator Aegis opened their brand new facility in Lima, set to fill 2,000 seats over the next two years.  “We see great opportunity to service both a growing domestic market and our existing markets [from Peru] in Latin America and Europe,” explained Sandip Sen, President of the firm’s Global Customer Life-cycle Management Business.  Contact centers are flourishing in Peru as they have over the past five years.  Exports since 2005 have grown from 5 to 40 percent of a 341 million U.S. dollar market.  However, recent concerns over a potential global commodities market slowdown could cut the market short, as well as dash the hopes of investment promotion groups looking to grow software and IT related services.

A Competitive Option

In total, the contact center industry in Peru employs approximately 30,000 heads, most of which work in the nation’s capital servicing the Peruvian telecoms and financial services industries.  Lima is a densely populated metropolitan area (around 8 million people) and the only population center in Peru with over one million inhabitants.  Other economically important cities exist such as Trujillo and Tacna, Peru’s gateway to the Chilean market along the southern border.  However, with almost one-third of the country’s population in Lima, the capital dwarfs all other domestic markets.

Aegis’ decision to expand into Peru was based on cost competitiveness and the agility of the Peruvian labor force, according to Sandip.  GDP per capita (indicative of wage rates) is 40 percent lower in Peru than in Argentina where Aegis already has operations (see figure).  “We have a large telecoms client in Argentina which we are now able to service at a much lower rate out of Peru.”

Sandip also likes the neutral Peruvian Spanish accent compatible with most markets including the United States and Spain.  Indeed, Spanish speaking markets make up 95 percent of contact center exports from Peru.  Spain and Chile consumed over 85 percent of the total, but with new operators like Aegis and Allus BPO that market portfolio will likely swing increasingly towards higher-cost countries in Latin America like Argentina and Mexico.

Scaling high-volume English operations is problematic in Peru given the premium placed on bilingual talent in a rapidly expanding export economy.

End of Commodity Super Cycle

In a recent Financial Times article Ruchir Sharma the head of emerging markets at Morgan Stanley Investment Management stated that “the daily news about falling oil prices is the beginning of a major shift in the global economy: the end of the “commodity supercycle.  Its end spells trouble for the many countries that have prospered in the past decade from the sale of raw materials.”  This situation leaves Peru’s economy and educational system vulnerable.

Despite strong macroeconomic performance, Peru’s overdependence on mining and food imports makes it sensitive to global swings in commodity prices.  In 2009 at the height of the global financial crisis the Peruvian economyonly grew at 0.9 percent as foreign direct investment – mostly in mining – screeched to a halt.  While a popped commodities bubble would be a boon for developed economies dependent on cheap imports, Peru (and other Latin American markets) could experience a severe and prolonged slowdown. “Although interest in Colombia and Peru is running high among investors, there are risks. The commodities boom has lifted both economies over the past decade and both are vulnerable to a potential decline in energy and metals prices, which has already begun”, noted Michael Polinski in a recent Wall Street Journal special report entitled “The New Tigers”.  Declining extractive industry profits would further agitate already sensitive relations between government and private sector as the federal and local governments strive to fund schools and new roads.

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Recently elected leftist president Ollanta Humala signed three tax bills last September, making good on a campaign promise to tax mining companies in order to raise funds (1 billion USD annually) for infrastructure and education.  To date, education spending as a percentage of GDP lags behind other Latin American countries so the additional funding will surely be welcomed (see chart).  Rural Peruvians also continue to migrate into larger metropolitan areas particularly into Lima where jobs are available (unemployment in Peru is around 7.5 percent) as well as the promise of education for their children, putting additional strain on the system.

Macro Indicators:  Peru Education Underfunded

image luke peru2 Is Perus Outsourcing Burst About to Go Bust?

 

 

 

 

 

 

 

 

 

 

 

 

Data Sources:  World Bank, CIA Fact Book; figure developed by Author

Humala’s recent tax policies could be threatened if a global fall in commodities prices slows Peru’s ten-year economic growth streak.  Falling mining company profits will likely put pressure on the left majority to compromise with business over recently raised royalties and tax rates on the extractive industries.  Either way, lower commodities prices will inevitably mean there will be less to go around whether it be in the form of profits or funding for education and infrastructure.   Promotional agencies like PromPeru are ambitious about the country’s ability to compete on higher-value services in IT and software development, but a hit to Peru’s ten year economic growth spree could cast a dark cloud over those ambitions.

 

About Luke Bujarski

Based in New York City, Luke Bujarski has over ten years of market research and international business experience. As former head of research for NSAM, Luke has traveled to the following markets performing market analysis: Guatemala, Panama, Colombia, Brazil, Mexico and Honduras.
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